The London interbank offered rate, the amount banks charge each other for such loans, rose 3 basis points to 4.81 percent, its 13th straight day of gains.

That's 81 basis points more than the European Central Bank's benchmark rate, the biggest gap ever.

The overnight euro rate rose for a second day, up 9 basis points to 4.08 percent, the BBA said today.”

That does not bode well for the equity markets in longer term. Libor rates are signaling that the financial system is under severe strain DESPITE massive injections of liquidity to date. Economic growth will almost certainly drop SIGNIFICANTLY in the near future.

The ECB will extend the maturity of its regular refinancing operation settling on Dec. 19 to two weeks from one, the Frankfurt-based central bank said in an e-mailed statement today. The operation will mature on Jan. 4 instead of Dec. 28. The ECB Governing Council, meeting via teleconference yesterday, decided the extra measure was necessary to “satisfy the banking sector's liquidity needs” for the holiday period over Christmas and the end of the year.

The move comes a day after the Bank of England said it will offer commercial banks emergency funds with longer repayment terms because of the risk that money markets will “tighten” at year- end. The U.S. Federal Reserve has also pledged to provide extra cash through a series of repurchase agreements into next year. Fallout from losses on U.S. subprime mortgages has made banks reluctant to lend to each other, pushing up credit costs.”

The Bush administration cut its forecast for economic growth yesterday, reflecting a deepening housing recession that's roiled financial markets since August. The Commerce Department reported the same day that the median price of a new house fell 13 percent in October from a year earlier, while fewer homes were sold than economists anticipated.”

The proposal is to ‘fix’ rates for 3 years, then allow the resets to occur. This does nothing but postpone the necessary price corrections. If you couldn’t afford a reset now, you won’t be able to afford the reset rate 3 years from now. End of story.

“Bair has proposed letting borrowers with adjustable-rate subprime mortgages, who are living in their homes and unable to afford resets, get extensions on the starter rate for at least five years. They could also be offered 30-year fixed-rate loans. Reich prefers a three-year freeze.

The rout will get worse because defaults on home loans are likely to rise, analysts said. The FDIC estimates that 1.54 million nonprime mortgages valued at $331 billion will reset by the end of next year.”

Enbridge closed four pipelines that supply an average of 1.5 million barrels a day after a blast yesterday killed two workers. The company said today a fire is still burning at the Clearbrook terminal in Minnesota where the pipelines meet.

“It's an important pipeline and it's also where it's being hit, these pipeline junctions are a nightmare,'' said Rob Laughlin, a senior broker at MF Global Ltd. in London. Oil “could go up further if it's shut for some time.””

As of 7:00 AM this morning, two of the four lines have been re-opened. Crude has given back some of the gains.

““All our lines are shut down until we can safely start up the system,” Denise Hamsher, a spokeswoman for Calgary-based Enbridge, said today by telephone. “At least one or two lines will be shut down for quite sometime.”

The leak and explosion occurred at the No. 3 pipeline, which was undergoing maintenance, according to Enbridge.

U.S. refineries operated at 89.4 percent of capacity, the highest since the week ended Sept. 14, the energy department said. Refiners usually start in November units that were shut during the previous two months for repairs after the summer driving season ends and before demand for heating oil picks up.

OPEC has no plan to raise oil output when it meets next week in Abu Dhabi because the market is well supplied, Qatar's oil minister said yesterday.”

There isn’t much slack in the system here. With pipeline troubles, even an OPEC production hike wouldn’t matter in the least.

“Kohn's comments just add to a perception that the Fed is embarking on a sustained path of easing,” said Michael Metz, the New York-based chief investment strategist at Oppenheimer Holdings Inc., which manages $60 billion. “There's also huge relief that the worst of the financial crisis may be behind us.””

It’s a little crazy to think the Fed would cut by 50 basis points in December…

“Traders boosted wagers that the Fed will cut its benchmark lending rate when it meets Dec. 11. Odds of a half-point cut rose to 8 percent today from 2 percent yesterday, while the likelihood of a reduction of any size remained 100 percent.”

A 50 basis point cut would destroy the US dollar, spike oil over $100 and send gold to $1000. Far more probably is a 25 basis point cut and a 50 basis point cut in the discount window to narrow that spread still further.

“The degree of deterioration that has happened over the last couple of weeks is not something that I personally anticipated,” Kohn said in response to a question following a speech to the Council on Foreign Relations in New York. “We are going to have to take a look at'' the stress in credit markets “when we meet in a couple of weeks,” he said.”

It was Kohn speech that prompted traders to increase their bets on a 50 basis point cut in December. This in turn burned the shorts who scrambled to get out of their positions in financials.

The figures came as Federal Reserve Vice Chairman Donald Kohn signaled he's open to lowering interest rates again given “the degree of deterioration” in financial markets. Stocks rose as Kohn's remarks cemented forecasts for a rate cut next month to help keep the economy from sliding into recession.

Falling “consumer confidence and the slowing in capital- goods orders does bring us closer to recession,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. “I take Kohn's remarks as a good sign that the Fed is looking at the credit market issues, as well as the economic data, and deciding to react.”

… and the market melted up. There may have been some bargain hunting. That much is for sure. The rest however, was pure short covering.

This might be the catalyst to give the financials a little bit of a relief pop.

“With the purchase of a 4.9 percent stake, Abu Dhabi, the largest emirate in the United Arab Emirates, would rank as Citigroup's largest shareholder ahead of Los Angeles-based Capital Group Cos. and Saudi billionaire Prince Alwaleed bin Talal, data compiled by Bloomberg show.

The Citigroup equity units that ADIA will purchase can be swapped for as many as 235.6 million shares starting in 2010. The securities will convert into Citigroup shares at prices ranging from $31.83 to $37.24 between March 15, 2010 and Sept. 15, 2011. Citigroup fell to $29.80 in New York Stock Exchange composite trading yesterday, the lowest price in five years, and traded in Germany at $31.51.

“The structure of the deal suggests that Abu Dhabi is very bullish, effectively participating in the upside beyond $37.24, and sharing in the downside below $31.83,” said George Nikas, who helps manage $1 billion at Deutsche Bank AG in Sydney.

Abu Dhabi will have “no role in the management or governance of Citi, including no right to designate a member” of the company's board, Citigroup said in its statement.”

If the markets can’t build a little bit of positive momentum on this, then that would be a bad sign indeed.

Citigroup may cut as many as 45,000 jobs in the next two months, CNBC reported earlier today, citing unidentified people within the company. CNBC also said the bank had “no timetable or set numbers” for the cuts. Citigroup spokeswoman Pretto said “any reports on specific numbers are not factual.””

Maybe the combination of a cash infusion and job cuts can breathe some life into Citigroup for a little while.

The promises calmed investors who drove two-year yields to 2.87 percent yesterday, the lowest since December 2004. The Fed said yesterday it will provide funds to the money markets, while the Citigroup purchase may help the world's biggest bank replenish capital hurt by subprime mortgage-related writedowns.

“The buying pressure on Treasuries has gone away,” said Christoph Kind, a Frankfurt-based fund manager at Frankfurt Trust Investment GmbH, which manages about $9 billion in fixed- income assets. “The news about Citigroup restored confidence a little. There's more value left in other bond markets.”

The “TED” spread, or the difference between three-month bill yields and the London interbank offered rate, narrowed 1 basis point to 1.94 percentage points, still near the widest since Aug. 20. The decline indicates easing willingness among banks to lend to each other. Three-month Libor still rose for a 10th day today to 5.06 percent, the highest in four weeks, the British Bankers' Association said today.”

The yen declined the most in two weeks against the dollar after the biggest U.S. bank announced the $7.5 billion cash infusion, which will shore up its capital following record losses related to subprime mortgages. The yen dropped the most against the New Zealand and Australian dollars, favorites of so-called carry trades. The dollar rose versus the euro and the U.K. pound.

“The market has taken this as a positive sign that there is funding out there for these banks should they need it,” said Daragh Maher, London-based senior currency strategist at Calyon, the investment-banking arm of Credit Agricole SA. “This has reduced some of the strain and given carry-trade investors a boost in what is clearly a very jumpy environment.””

Investors in the SIVs will be able to exchange their holdings for debt issued by a new company, backed by loans from HSBC, the London-based bank said in a statement. HSBC doesn't expect any “material impact'' on its earnings or capital strength, according to the statement.

HSBC's decision reduces the worldwide assets in SIVs as U.S. lenders led by Bank of America Corp. seek to persuade competitors to help finance an $80 billion bailout of the companies. HSBC's Cullinan Finance Ltd. and Asscher Finance Ltd. have more than $34 billion of senior debt, making it the second-largest bank sponsor of SIVs after Citigroup Inc.”

How taking onto your balance sheet an unexpected $45 billion isn’t going to have a ‘material impact’ is beyond me.

The campaign starts this week with New York-based Citigroup and JPMorgan in supporting roles to Charlotte, North Carolina- based Bank of America, said two people with knowledge of the matter, who didn't want to comment publicly before the plan is formally announced.

The “SuperSIV” fund, backed by U.S. Treasury Secretary Henry Paulson, would buy assets from so-called structured investment vehicles, whose $300 billion of holdings include corporate and mortgage debt in danger of default. Analysts including Richard Bove of Punk Ziegel & Co. have criticized the proposal because it may saddle new participants with losses created by their bigger rivals.

``Why should we put something on our balance sheet that is going to result in further writedowns?'' is how most contributors will respond, Bove said in an interview. ``The job of the Treasury isn't to go out and defraud investors.''

Bank of America, Citigroup and JPMorgan, the three largest U.S. banks, want SuperSIV in place by year-end because some SIVs haven't been able to trade, people familiar with the fund said. BlackRock Inc., the biggest publicly traded U.S. money manager, probably will manage the fund, said a person with knowledge of the plan.”

Bad ideas are hard to kill. With HSBC moving their SIV assets onto their own balance sheet, the likelihood of the Super SIV ever seeing the light of day is greatly reduced.

Northern Rock rose as much 57 percent in London trading after saying today in a statement that Virgin offered an immediate repayment of 11 billion pounds ($22.7 billion) toward about 25 billion pounds lent by the central bank. Virgin would also inject 1.3 billion pounds into Northern Rock, half funded by new shares offered at 25 pence each to existing holders.

“It's an indicative proposal and not an offer, and could leave the door open to a counter-bid,'' said Simon Willis, a London-based analyst at NCB Stockbrokers. “That's why I can see the shares trading higher.””

An acquisition by Virgin at these prices would definitely act as a catalyst for a short lived ‘relief’ rally in the broader indices.

Disclaimer

The Financial Ninja is a collection of my thoughts and opinions about current economic and market conditions. These are not buy and sell recommendations. Use your head and do your own research. This is a forum to stimulate discussion and debate.

About Me

I started trading during the tech bubble when I was still in high school. My trading has financed my education and I have since completed a BA in Economics and an MBA with a concentration in Finance. I have worked as both a proprietary equity and fixed income derivatives trader.